JPM Cuts All Residential Mortgage REIT Price Targets

By Michael Aneiro

JP Morgan this week cuts the price targets on all the residential mortgage real-estate investment trusts it covers “due to the sell-off in interest rates, agency MBS, and Prime and Alt.A MBS.” This comes after several other financial firms cut their mREIT price targets recently to catch up with actual share prices following the mREIT sell-off of the past few months.

JPM cut AnnalyCapital Management (NLY) to $10.50 from from $13 with a neutral rating; Western Asset Mortgage Capital Corp. (WMC) from $22 to $15 with a neutral rating; Apollo Residential Mortgage Inc. (AMTG) from $22 to $16 with an overweight rating; and MFA Financial (MFA) to $8.00 from $9.00 with a neutral rating. Here’s JPM:

During the quarter, residential MREITs in our coverage universe sold off approximately 20%. NLY, MFA, WMC, and AMTG were all subject to higher interest rates and higher agency yields during the quarter. However, MFA and AMTG have significant allocation to Non-Agency MBS which either declined less severely than Agency MBS (Prime and Alt.A) or traded higher (Sub-prime). As such, we believe that MFA’s and AMTG’s MBS portfolios did not decline as much as those of pure-play agency MREITs. Additionally, both WMC and AMTG have payer swaptions in addition to pay-fixed swaps, which we would expect mitigated some of the losses on Agency MBS.

Our 2014 price targets for residential MREITs reflect a slight discount to NAV (0.95x) to account for heightened volatility and risk bias towards higher rates. We note that we do not explicitly model changes in MBS markto-markets outside of the customary “pull to par” (as all fixed income instruments move closer to maturity, prices move closer to face value, even if rates and spreads do not change or change as expected). We believe consensus forecasts for higher rates are already priced into current valuations.

JPM also looked at commercial mortgage REITs, which it says declined by 14% during the quarter, cutting its target on Ares Commercial Real Estate Corp (ACRE) to $15.50 from $17.50 with an overweight rating, while keeping its $16.50 price target and neutral rating for Apollo Commercial Real Estate Finance (ARI) and initiated a price target of $28.50 for Blackstone Mortgage Trust (BXMT) with an overweight rating. “With the exception of ACRE (which issued a dilutive equity offering), we do not feel the sell-off is warranted on the basis of fundamentals,” JPM writes.